Asia Pacific Real Estate Marks Turning Point Selective Value Add Opportunities

Sentiment toward real estate is on the upswing, with 2025 expected to mark a turning point for capital values. However, PGIM Real Estate notes that debt and equity liquidity are still subdued compared to the last cycle (Exhibit 1). This is due to a drop in values and higher interest rates, which has created a funding gap and put pressure on existing capital structures.

For investors, this presents opportunities to selectively acquire undervalued assets and capture immediate upside. These opportunities are most attractive in properties facing cash flow challenges, such as those with short lease expiries or in need of significant capital investment.

If you’re interested in investing in overseas properties, there are many projects available for sale around the world. However, low liquidity can result in mispricing, as seen in the discrepancy between yields and rental growth in logistics and retail (Exhibit 2). This offers investors the potential for higher returns.

One indicator of mispricing is when the standard deviation of yields across markets doesn’t align with the standard deviation of rental growth. In recent years, this has been true for logistics and retail sectors, presenting a compelling opportunity for investors.

Institutional-quality real estate requires significant capital expenditure (capex) to meet sustainability standards. However, over the past decade, non-institutional real estate capex has been significantly lower than institutional investment (Exhibit 3). This means that much of Asia Pacific’s real estate stock, particularly those held by smaller owners, will need to be modernized and institutionalized.

With financing becoming increasingly difficult to secure due to higher rates, stricter credit requirements, and growing focus on ESG, well-capitalized investors with expertise will be favored. This financing shortfall presents a substantial opportunity for the coming cycle, especially as tenants gravitate towards high-quality properties. The extent of this opportunity varies by city – for example, Hong Kong and Sydney have a higher share of older stock, while newer properties are more prevalent in Beijing and Shanghai (Exhibit 4).

In Japan, government reforms are leading to more corporate divestments of under-managed real estate assets, particularly in office and retail sectors, compared to relatively modern logistics properties.

Since the global financial crisis, new supply of real estate has been limited due to high building costs, tighter financing, and weak investor sentiment towards development. While this is rational in weaker segments like suburban office or retail, it also applies to high-demand sectors like housing, CBD offices, data centers, senior living, and hotels. This supply shortage will give landlords greater pricing power and drive rental growth.

The value-add landscape is expanding thanks to two major shifts: sectoral diversification and geographic expansion. Investment is moving beyond traditional office, retail, and logistics into sectors like multifamily housing, hotels, student accommodation, co-living, senior living, and co-location data centers. The share of investment in these operational sectors has risen from 7% in 2014 to 17% in 2024. Geographically, institutionalization is increasing in Australia and Japan, while second-tier markets like Nagoya, Fukuoka, and Perth are becoming more liquid. This also applies to countries like South Korea and Japan, where there is a higher share of non-investable stock, offering potential for value creation through modernization.

But there are also current challenges to consider, such as elevated interest rates. While short-term rates are falling, long-term rates remain higher than in the last cycle and are expected to stay that way. This reduces the potential for yield compression, meaning that returns will be driven by rental growth and cash flow resilience rather than leverage.

Traditional assets are expected to deliver only modest returns of around 2% per year, which historically translates into modest non-core performance. Achieving higher value-add returns will require investing in non-traditional assets like operational sectors and repositioning under-managed properties.

There are five main value-add investment strategies, each with its own risk-return profile. A balanced portfolio will likely incorporate a mix of these strategies:

1. Operational platforms – These are crucial for driving rental growth, whether in senior living, hotels, logistics, or offices with flex space offerings.

2. Development – This strategy focuses on sectors with strong structural demand, such as living, logistics, and data centers.

Experience the perfect combination of contemporary living, accessibility, and convenience at Rivelle Tampines. This development, located near Tampines West MRT Station on the Downtown Line, boasts a strategic location surrounded by established shopping, educational, and recreational facilities. It is the ideal choice for both homeowners and investors, with its diverse offerings catering to a wide range of needs. Developed by Sim Lian Land, Rivelle Tampines is set to become a highly sought-after address in District 18, whether for personal residence or a long-term investment.

3. Mispricing – Opportunities for mispricing exist in offices, logistics, retail, and hotels, especially those still adjusting post-pandemic.

4. Active asset management – This approach will drive returns in traditional sectors where operational platforms are not involved.

5. Institutionalization – Upgrading privately held living assets or family-owned hotels presents significant opportunities for value creation.

In terms of target markets, institutional activity remains concentrated in just five countries, which accounted for nearly 90% of transactions since 2008 (Exhibit A1). These markets also rank high in investment size, financial development, and transparency (Exhibits A2–A4). At the city level, the top 10 cities captured almost 80% of all transaction volume over the past decade (Exhibit A5). This is due to their high liquidity and market size (Exhibits A6–A7). However, liquidity is also improving in second-tier cities like Nagoya and Fukuoka, which are becoming increasingly institutionalized.

In summary, Asia Pacific’s real estate market is entering a more selective but opportunity-rich cycle. While returns will be driven less by yield compression and more by rental growth and asset quality, there are clear avenues for outperformance. Focusing on mispriced assets, modernizing under-invested properties, and building exposure to operational platforms will be key to capturing the upside in the years ahead.